Robots have arrived on Wall Street

Last week marked the debut of an upstart fund called the AI Powered Equity ETF, an actively managed security that seeks to use artificial intelligence to beat the market. The exchange-traded fund officially launched last Wednesday so it is too early to measure how this fund will perform over the long term.

At its core, AIEQ ETF is powered by the big-data processing abilities of IBM’s Watson. It is responsible to develop a portfolio of stocks that will be able to offer results that are not only better than  human stock pickers  but also the overall market. Most ETFs are passively managed and follow indexes like the S&P 500, the Dow industrials or other sectors. In other words, your new portfolio manager is a computer program.

The fund currently is composed of 70 stocks, plus an allotment of cash, that are spread around sectors. Components are determined by “their probability of benefiting from current economic conditions, trends, and world- and company-specific events,” EquBot said in a news release.

The top five holdings by concentration are Penumbra 4.63%, Boyd Gaming 4.51%, Genworth Financial 4.45%, Mednax 3.8% and Triumph Group 3.52%, according to XTF.com. The turnover is expected to be high around 2% – 3% per day. The fund charges an expense ratio of 0.75%, which is slightly lower than the average expense ratio for actively managed ETFs.

The information explosion has made the jobs of portfolio managers, equity analysts, quantitative investors and even ETF builders more challenging. New technology in artificial intelligence could help solve those challenges. There’s still quite a range in AI models being used. There could be other quantitative groups that are looking at the same raw data but analyzing it in a different way, meaning the same input material can result in different insights and outcomes.

Another example of an unusual method for picking stocks is  Buzz US Sentiment Leaders ETF BUZ, an exchange-traded fund that selects its holdings based on positive chatter in social media and other online sources. The fund is up 17.2% in 2017, above the 13.9% rise of the S&P 500.

If the IBM’s Watson stock picking outperforms over the first quarter and money flows into the EFT, you’re going to see 20 competitors inside of six months.

This is a very gutsy structure, I am putting this ETF on my watch list. I am also going to monitor the top ten holdings of this ETF to get some stock picking ideas.

 

 

 

 

 

 

 

 

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Investing ideas: I liked the product so much, I bought the company

Victor K. Kiam made a fortune as the President and CEO of Remington Products which he famously purchased in 1979 after his wife bought him his first electric shaver. Kiam became famous as the spokesman for the Remington shaver. His catchphrase, “I liked the shaver so much, I bought the company”, it made him a household name.

Your iPhone is your BFF and you can’t function without a Starbucks latte. You post something on your Facebook page every day, go home from work and chill out by watching Netflix. They’re all products you love and know well.

But does that mean the companies behind them are good investments?

The short answer: At least it’s a good starting point.

At first glance, it isn’t a terrible idea to own stocks if you have a good understanding of a company’s products and have a good feeling it will be successful. Yet knowing whether a business makes a good product and has excellent customer service are by no means the only measurements for investing.

For example: Snapchat (SNAP) and Twitter (TWTR) are both very popular but can they become sustainable businesses with positive earnings growth? So far, it isn’t looking very good for either of these companies. Before you invest, you have to determine whether the product or service is just a new fad or a money-making long-term trend.

One of my best investment ideas in 2016 came from going on vacation on a cruise line. Talking to other passengers I got very positive feedback on their cruise line experiences. Plus many of my boomer friends confirmed that they also loved taking a vacation on a cruise line.  The baby boom generation is getting older and I had dinner with many passengers in their eighties and even with one women in her nineties. (This could be a long-term trend)

Although I was on vacation on a Carnival ship, I bought shares in Royal Caribbean after extensive research.

Price / Earnings Earnings growth (5yr) Operating margin
Royal Caribbean 17.7 times 16.45% 19.95%
Carnival 18.5 times 8.95% 16.63%

It turns out that I could have beaten the returns of the S&P 500 index by owning either RCL or CCL as illustrated by the chart below.

Finding good, long-term investments is exceedingly difficult, there are only a few good ideas out there. When you find an extraordinary business and you have an understanding of what its future looks like, you should invest some money into it. Unfortunately, going that takes time, effort and know-how, often more than casual investors will do on their own “but it can be done”.

My 200th post: Investing in the Second Machine Age

As a retired senior, I am having difficulty adjusting to ” the Second Machine Age”. The advances in technology are mind blowing. I would never have guessed that self-driving cars in science fiction movies like “Minority Report”  or “I Robot” could become available in my life time.  How about Elon Musk’s vision of offering a rocket ride of only 30 minutes to get to London from L.A., is that just science fiction or a potential reality?

China, the world’s biggest vehicle market, is considering a ban on the production and sale of fossil fuel vehicles in order to reduce pollution and boost the production of electric vehicles. The move would follow a similar ban by France and Britain but they have included a 2040 timeline. However, China has introduced draft regulation to compel vehicle manufacturers to produce more electric vehicles by 2020 through a complex quota system.

Some possible investments to consider

  1. Millions of dollars are pouring into the Global X lithium & Battery ETF (LIT). It has had a massive gain in value of 58% so far this year. It has also attracted short sellers who are betting on a pullback in price.
  2. For stock pickers, the top ten holdings of LIT include five U.S. listed companies, ticker symbols Tsla, FMC, SQM, ENS and ALB. A word of caution, some of these stocks have very high valuations and can be very volatile.

There is little doubt in my mind that advances in digital automation, robotics and artificial intelligence will change your living standards over the next decade. Just think how companies like Facebook, Amazon, Netflix, Google and Apple have already influence our lives during the past decade.

A 2013 study by Oxford University’s Carl Frey and Michael Osborne estimates that 47 percent of U.S. jobs will potentially be replaced by robots and automated technology in the next 10 to 20 years. Those individuals working in transportation, logistics, office management and production are likely to be the first to lose their jobs to robots, according to the report.

Some possible investments to consider to capitalize on this trend

  1. Robotics and Automation ETF (ROBO) which contains three U.S. listed companies in their top ten holdings. Ticker symbols, AVAV, HOLI and CGNX
  2. Global X Robotics & Artificial Intelligence ETF (BOTZ) which contains three U.S. listed companies in their top ten holdings. Ticker symbols: NVDA, ISRG and TRMB
  3.  Semiconductor ETFs like SOXX or SMH which include companies that provide key components for self-driving vehicles, automation, robotics and artificial intelligence. The top ten holdings of these ETFs are places to look for individual names that could outperform the overall market.

There is also an interesting book that I am thinking about buying.

Synopsis: According to the authors, the book has three sections.

  • Chapters 1 through 6 describe “the fundamental characteristics of the second machine age,” based on many examples of modern use of technology.
  • Chapters 7 through 11 describe economic impacts of technology in terms of two concepts the authors call “bounty” and “spread.” What the authors call “bounty” is their attempt to measure the benefits of new technology in ways reaching beyond such measures as GDP, which they say is inadequate. They use “spread” as a shorthand way to describe the increasing inequality that is also resulting from widespread new technology.
  • Chapters 12 through 15, the authors prescribe some policy interventions that could enhance the benefits and reduce the harm of new technologies.

You can also search you-tube “The second machine age” to listen to the authors speak. 

 

Disclaimer: Do your own research, these investment ideas can be very volatile. 

Upcoming blockbusters could boost movie chain stocks

I have to admit that one of my guilty pleasures is watching movies on a big movie screen. My wife and I really enjoy science fiction and superhero type movies. We see anywhere from 10 to 15 movies every year. Sometimes we will even see the same movie more than once.

2017 has been a rough year for the film industry, with the North American box office suffering its lowest-grossing summer in 25 years. Ticket sales are down 10.8 percent this summer and have decreased by nearly 3 percent year to date. Box office flops such as “The Mummy” and “Baywatch” have hurt Hollywood but there will be some upcoming movies this year that could turn into blockbusters.

Release dates in November and December of 2017 include Thor: Ragnarok, Justice League and my personal favorite Star Wars: The Last Jedi.  Upcoming movies in 2018 appears to be very strong with:

  • Black Panther
  • X-Men: The New Mutants
  • Avengers: Infinity War
  • Han Solo,
  • Deadpool 2 
  • Ant-man & The Wasp.

However, investors have really punished the movie chain stocks. U.S. chains, Regal Entertainment (RGC) and Cinemark (CNK) are down 35% & 25% respectfully over the past 6 months. Cineplex (CGX) the largest Canadian chain is also down 25%, see chart below:

The vast majority of theaters in the U.S. keep a larger percentage of the ticket sales the longer the film is in the theater. For example: opening weekend they may get 10%, the 4th  week up to 25% and the 10th  week up to 50% or more. While concessions account for only about 20% of gross revenues, they represent about 40% of theaters’ profits. Profit margins on soda and popcorn average 85 percent.

All three of these stocks pay dividends, Regal has the highest yield of 5.7% followed by Cineplex at 4.35% and Cinemark with 3.43%. I expect that their 3rd quarter results could disappoint which would be a good buying opportunity. However, there is a risk that the price of these stocks could move up in anticipation of better future earnings.

Possible ways to trade a rebound in movie chain stocks

  1. Take a half position now and buy the other half after 3rd quarter earnings are released
  2. Buy a full position near the ex-dividend date, to get paid while you wait
  3. Buy half position, sell covered calls and sell cash secured puts for the other half.
  4. Buy some long calls near 4th quarter earnings release scheduled for Feb. 2018

Being an option trader, I am going to wait until Feb 2018 options are available. If the VIX which measures volatility stays low, I will probably buy a call option on one or two of these stocks.

 

Disclaimer: This post is for discussion purposes, do your own research.

A big disconnect between the Stock Market and the Canadian Economy

Canada’s economy is expanding at its fastest annualized rate in six years according to Statistics Canada. That’s a quarterly expansion rate of 4.5% which is the highest figure since the third quarter of 2011. It was led by the biggest binge in household spending since before the 2008-2009 global recession.

Economists had predicted Canada to grow around 3.7% and the Bank of Canada latest forecast was for GDP to expand at 3% in their July press release. When combined with the 3.7% expansion of the first quarter, it’s the strongest six month start in 15 years.

Why isn’t money pouring into the Toronto Stock Market?

Often times the equity market is moving well before the economy does and of course the Canadian equity market had a robust year in 2016. Investors may already have priced in all the good news last year, when Canada’s stock index gained 18 percent, one of the world’s best performances.

Part of the problem is that Canada’s stock market isn’t totally reflective of the economy, since it’s heavily reliant on energy and financials. Those two sectors account for 54 percent of the S&P/TSX Composite Index.

The outlook for oil is very subdued, it is still trading below $50 a barrel even with the shutdown of refineries due to hurricane Harvey. Global inventories continue to stay high and OPEC’s has lost its influence in cutting production. Crude oil prices in the future’s market are still below $50 a barrel for all of 2018 and part of 2019. Foreign investors are taking money out of the Alberta’s oil patch.

Continued growth in residential investments which was up an annualized 16 percent in the first quarter is also likely to fade as the impact of government measures to cool housing markets kick in. Although, bank earnings have beat expectations by a wide margin, loan growth going forward is expected to decline and loan losses are expected to increase. U.S. hedge funds are still shorting Canadian financials expecting the housing bubble to burst.

Investors believe that this robust growth will force the Bank of Canada to continue raising interest rates this year. It could add extra pressure to lowering consumer spending due to high indebtedness of Canadian households. It will also add a cooling effect to the hot housing prices in both the Vancouver and Toronto real estate markets. The rapid rise in the value of the Canadian dollar is added proof that currency traders are betting that a hike in interest rates is coming soon.

Uncertainty over NATFA  renegotiation

Global political developments aren’t helping, with renegotiation of the North American Free Trade Agreement which started in August, created a new spat with the U.S. erupting over aerospace manufacturing.

Already, data suggest investment into the country is cooling. Foreign direct investment in Canada dropped 25 percent to C$8.68 billion in the first quarter, according to separate data released Tuesday. The country relies heavily on foreign funding to finance spending — totaling C$130 billion over the past two years, according to balance of payment data.

Canada has benefited from a convergence of developments that include a coordinated global recovery and rising trade volumes. The bottoming of the oil shock in western Canada, along with federal deficit spending, rising industrial production in developed economies. Canadian consumers have benefited from a buoyant jobs market and rising home values, resulting in a surge in consumer spending.

Is this Sustainable? I think not!

Economists had been predicting a slowdown in growth to about 2 percent in the second half of this year, but are revising numbers up after the GDP report. I believe this surge in economic growth is temporary. The higher value of the Canadian dollar and higher interest rates will dampen economic growth.

The Toronto stock market returns for all of 2017 are flat which could indicate that foreign investors also believe the future going forward isn’t so rosy!

 

 

 

Why you should look under the ETF’s hood

A fund’s name might seem like a good starting point for gaining an initial understanding of how it is constructed. Unfortunately, names turn out to offer little help for evaluating funds. There is simply no universally accepted system in use by ETF providers and research to classify funds. For example “Infrastructure” would seem to have something to do with the amenities, roads and power supplies needed to operate society.

Names can be deceiving! To illustrate, I went to one of my favorite ETF provider’s web site to look under the hood. I was looking to find some discrepancies. It took some time but the geographic allocation in the fact sheet on the BMO Global Infrastructure Index ETF (ZGI) wasn’t global at all but had the majority of their holdings in North America.

  • 66.02% United States
  • 25.16% Canada
  • 6.71% United Kingdom
  • 1.56% Mexico
  • 0.56% Brazil

The top ten holdings also have a lot of pipeline companies who pay construction companies to build the actual  infrastructure.

  • Enbridge 10.07%
  • American Tower Corp 8.82%
  • National Grid Plc 6.71%
  • TransCanada Corp 6.68%
  • Crown Castle Intl Corp 6.07%
  • Kinder Morgan 5.87%
  • P G & E Corp 5.17%
  • Sempra Energy 4.25%
  • Williams Cos 96%
  • Edison International 3.82%

It takes years for pipeline companies to benefit from any new capacity to come on line. On the other hand, companies who specialize in construction & engineering like SNC-Lavalin or Aecon would see immediate revenue growth. I would recommend looking for another infrastructure ETF that had more global exposure with holdings of construction & engineering type companies.

Another example is the BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN) which has a small discrepancy. The fact sheet says it has 26 industrial holdings but two of those holdings include airlines. (Air Canada 5.46% & Westjet 4.13%)  Now both of these companies buy industrial products but they specialize in transportation.

Here are some key steps all investors should take when evaluating ETFs:

  1. First, decide if you are going to be a do-it-yourself investor or work with an advisor. As their name suggests, ETFs are traded on exchanges, so they can be bought and sold like stocks through a discount brokerage.
  2. Make sure you understand the index underlying the ETF you are considering. Focus on how the index is constructed, what it tracks and how long it has been around. A longer record will reveal how the index responded to different market conditions.
  3. Check the fund’s fact sheet, are the underlying holdings and geographic allocation accurate? How does the exchanged traded fund compare with similar funds from other providers?
  4. Avoid ultra-short and leveraged ETFs, leave those to professional traders.

Ultimately, the proper implementation of ETFs in a portfolio requires, like all investment decisions, due diligence, caution and persistence. ETFs can offer many attractive features but their long-term value depends on how well they fit into an individual’s portfolio.

To evaluate an appropriate fit, investors have to be prepared to look under the hood.

 

 

 

How has the Trump circus effective your investments?

As a Canadian, I think that the Washington circus is no longer funny. It has become “very scary”. We came very close to a nuclear war. Tensions regarding North Korea have lessen temporarily and the market sell off could have been a lot worse. So far, investors have ignored the noise coming out of Washington as U.S. corporate earnings have been better than expected.

Canadian and European investors with holdings in U.S. dollars have seen their investment returns reduced by the falling value of the U.S. dollar. For example, my investment club’s U.S. portfolio is up 10.2% as of the end of July. However, it is up only 2.3% when converted into Canadian dollars. The value of the Euro is also up 10% compared to the U.S. dollar.

The recent rally in gold is another sign of a weakening value of the U.S. dollar. A falling dollar not only increases the value of other currencies, it also increases the demand for commodities like gold. Investors buy gold as a hedge against a further weakening of the U.S. dollar.

American investors with holdings outside of the U.S. have benefited the most from a weaker dollar. Corporations that generate revenue outside the U.S. will get an earnings boost from foreign profits.   Keep in mind that the bond market doesn’t believe the Trump growth agenda will get passed any time soon. The yield on 10 year treasuries has fallen back to pre-election lows. Returns in U.S. bond portfolios have been positive for American investors.

Biggest Market Risks

  1. More inflammatory tweets from Trump regarding North Korea
  2. The resignation of Trump’s key economic advisors, Gary Cohn and Steven Mnuchin
  3. The Fed increasing short term rates causing an inverted yield curve which historically causes a U.S. recession.
  4. In fighting within the Republican Party continues and they are unable to pass meaningful economic fiscal policy.
  5. Trump’s desperation for a win causes him to tear up the NAFTA agreement?

I find this very disturbing:

President Trump’s approval rating is at its lowest since he took office with only 35% of Americans giving him a positive rating, according to a Marist Poll released Wednesday.

Although he is still popular among Republicans, his key constituency, his job performance rating has dropped among strong Republicans from 91% in June to 79% now.

Hard to believe that 79% of Republicans still approve of President Trump!

Lets hope that American voters will come to their senses during the 2018 elections!!